India is undoubtedly one of the fastest-growing economies in the world. A major outcome of economic growth is the increased financial capacity of citizens. This paves the way for banks and financial institutions to offer more products and services. In recent years, credit cards have gained increased loyalty from Indians without any demographic restrictions. In 2022 alone, data shows that nearly 73 million credit cards were issued in the country.
How people use credit cards has evolved significantly in recent times. In the past, credit cards were perceived as an elite accessory that only high-income individuals were able to diligently manage. The fear of debt accumulation owing to poor financial discipline was keeping both issuers and consumers away from credit cards.
Besides, high annual fees combined with restrictions on credit card swipes at smaller business outlets due to high MDR made them very less attractive in the past.
Fast forward to today, the credit scenario in India has changed drastically. Even though some banks still charge maintenance fees or require high spending patterns to retain benefits, a lot of users can maintain their credit cards easily. The magic behind this change is none other than the option to pay rent with credit cards in India.
As fintech companies competed to win customers’ hearts, they bombarded the market with tons of opportunities that allowed seamless credit card usage. Rent payment was one such facility that exploded in popularity. Today, almost all of India’s leading payment apps, real estate websites, and even banking apps permit rent payments with credit cards.
Users can simply add a beneficiary and pay them directly from the app, even via a UPI gateway. This feature has resulted in credit card users being able to amass spend-based benefits of credit cards like fee waivers, reward points, cashback, air miles, etc.
Fintech companies, as well as other businesses, are partnering with banks or card companies to issue co-branded credit cards. They offer a lot of exciting benefits for different categories of spenders.
All in all, rent payment has allowed users to maximize benefits from their respective cards with ease. Nearly all hard-working individuals will save money for their rental commitments every month.
On the consumer side, rent payments with credit cards are a great way to leverage spend-based credit card benefits. For providers like banks and card companies, the utilization of a credit card payment ecosystem for rent may present some challenges.
Even though most payment platforms that facilitate credit-card-linked rentals charge a commission for processing such transactions, there is more to it than just a small processing fee. The revenue is a good incentive, but there are other risks and challenges that banks and fintech players need to look into while allowing such financial transactions.
Let us explore the key challenges that providers of credit card-linked rent payments need to address:
Several users trick the rent payment system by entering the account details of their friends or families as the rent recipient. They then use the credit card to transfer money, which will be returned to them as liquid money. This practice, known as credit rotation, actually provides a way for cardholders to convert their credit into cash without high-interest rates and nearly zero charges for 45 days. They only have to pay a minimal processing fee.
Such a setup undermines credit card monetization schemes of banks, and hence, providers must ensure that there are checks in place to verify rent recipients before the transaction. The use of rental agreements, custom checking of payment patterns, etc., can help minimize such events from happening frequently.
Banks and financial institutions must strive towards having a highly configurable reward scheme for their credit cards. The reward program must be configurable to address leaks in the system, like the use of rent payment abilities for non-rental payments. An example could be capping rewards for rent payment transactions or setting limits for reward redemption from accumulated rental payment-based points.
They may even further add fees on top of the processing fee charged by payment platforms. Such fees could be reimbursed with a healthy credit spend. The bottom line is that card management from the provider side should be flexible and accommodative of innovative approaches.
If consumers are not fiscally responsible, rent payments through credit cards can easily spiral into a huge debt fiasco. Even if they can repay, it is equally important to maintain a healthy utilization ratio of credit card debt to obtain a good credit score. Banks must implement measures to help notify customers about pending payments, breaches of safety limits, and much more.
This will help in reducing fraudulent transactions as well. When users are aware of the risks, it is not likely that many will attempt to perform such transactions in blind faith.
Rent payment is undoubtedly a stimulus for the increased patronage of credit cards in the country. For banks and financial institutions, credit cards provide an opportunity to monetize their customer base considerably through targeted offers and campaigns. Hence, the flip side of lower fees obtained through processing rentals could be compensated by a good margin.
But the key point here is that banks need to have a flexible payment system that can accommodate credit card-linked payments for categories like rent. It must allow them to set rules, define terms and conditions, minimize fraud, and streamline transactions. Achieving all this requires the use of strategic technology solutions that players like Verinite can offer. Get in touch with us to learn more.